Life insurance is confusing, complex, and somewhat intimidating for most of us. How much do we need? How long do we need it for? What kind of policy do we need? For most new life insurance buyers, a term policy is a great place to start.
What is Term Life Insurance?
A term policy is insurance that you buy for a pre-determined, pre-defined number of years. The most common policies are written in 10-year, 15-year, and 20-year terms, although some insurance companies will write custom term policies.
No matter how long the policy lasts, the death benefit of the policy remains the same throughout its term. The death benefit is the amount of money paid out if the insured dies during the life of the policy. Some insurance companies will only issue policies with a minimum of $100,000 in death benefit, while others will write policies for smaller amounts.
Let’s use an example. Joe is 25, and he bought a 10-year term life insurance policy on March 31, 2013. On March 31, 2023, Joe’s policy will expire. If Joe dies during the life of the policy, his beneficiaries will receive $100,000. Simple, right?
With term insurance, you pay a set amount of money every month to keep the policy alive. This amount is called a premium. As long as you pay the premium, your policy is active. Quit paying the premium and your policy is terminated by the issuing company.
Your premium amount is determined by a number of factors. When you apply for a new policy, you will be given a rating class. Your rating class depends on your age, health, family history, and other factors. Basically, your insurance company will determine the likelihood of you dying within the time frame of your policy, leaving them with a payout to your designated beneficiaries.
The higher the rating class, the lower your premium. This is one area where it definitely pays to be young and healthy.
Your premium amount is also affected by the length of the policy. A 10-year term policy is typically cheaper than a 20-year. That’s because an insurance company is on the hook for a payout longer with a 20-year policy. Also, your chances of dying are higher in 20 years than they are in 10.
Let’s look at Joe’s policy again. Joe is young, exercises regularly, and has no diagnosed health conditions or concerns. His parents are both alive and â€“ while they are fighting the regular aches and pains of aging â€“ they are healthy. As a result, Joe receives the highest rating class available. Because he has a 10-year term policy, his monthly premium is very affordable.
The Pros and Cons of Term Life Insurance
The great thing about term insurance is that the premium remains the same throughout the life of the policy. Take Joe, for instance. He doesn’t know it now, but in 5 years he will develop high cholesterol and start fighting a bit of stomach spread. His health isn’t optimal like it was when the policy was issued. However, he will still pay the premium amount that was determined when he was 25 and in great shape.
The downside of term life insurance is its use it or lose it nature. A policyholder could pay on term insurance for the entire life of the policy and never see a return on that money. However, at any time a policy holder can convert term life insurance to permanent life insurance, usually taking advantage of the rating class that was given when the term policy was first issued.
In the world of life insurance, term policies are usually the most straightforward and easiest to set up. They work for everyone, and are ideal for individuals who are looking for an affordable way to get started with life insurance.